Posts Tagged ‘Trustees’

SEPTEMBER 13, 2016 VOLUME 23 NUMBER 34
Now that ABLE Act programs have been set up in several states, you might wonder if it’s time for you to set up an account for yourself or a family member with a disability. How can you figure out whether ABLE is right for you? We’ll try to help.

The Achieving a Better Life Experience Act (ABLE Act) was passed in 2014. It permitted people with disabilities to have a separate account, usable for disability-related expenses, that would not be counted as an available resource for Supplemental Security Income (SSI) or Medicaid eligibility purposes. States were encouraged to set up ABLE Act programs, and people with disabilities were permitted to open an account with any state — provided that the state permitted non-residents to participate.

So far, four states have opened their ABLE Act programs. One of those (Florida) permits only Florida residents to participate. The other three (in Ohio, Tennessee and Nebraska) are open to anyone who qualifies.

ABLE limitations

There are a number of concerns about ABLE Act accounts. First, no more than $14,000 per year can be put into an account. Second, any funds left in the account at the death of the participant — regardless of where the money originally came from — will be paid to the participant’s state’s Medicaid program. Those two limitations make ABLE Act accounts unattractive for most family members who might otherwise think of giving or leaving substantial assets to a loved one who happens to have a disability.

There is a lot of misunderstanding about one other item: are ABLE Act accounts like investment accounts, or more like checking accounts? In some cases they might look like one or the other, but thinking of ABLE Act accounts as terrific investment opportunities for people with disabilities is, well, just misguided. Earnings will be limited, expenses are likely to be somewhat higher than similar accounts for other purposes (like education accounts, on which the ABLE Act accounts were modeled), and any account that does grow to more than $100,000 will cause suspension of SSI benefits anyway. We believe that, in most cases, ABLE Act accounts will most resemble checking or savings accounts.

ABLE uses

That doesn’t mean that the ABLE Act won’t provide terrific opportunities, however. There are a number of situations in which we imagine the ABLE Act will be a great boon for beneficiaries. A sampling of the most likely beneficial circumstances for ABLE Act accounts:

The capable beneficiary. Are you the person with a disability? If you could handle a savings account yourself, but have been unable to put anything away because of the $2,000 asset limit for SSI, then the ABLE Act was written for you. You can now save any money you don’t need from your SSI each month, and park it in an ABLE Act account. You can save for vehicle repairs (or a new vehicle), for tuition, or even for the property taxes on your home. There are more uses you can consider, and you probably see the possibilities.

The housing shortfall. Do you (or a family member) get assistance with your housing expenses? And when you do, does that reduce your SSI benefit? If so, you might explore the ABLE Act account as a way to pass the housing assistance through a sieve that makes it perfectly permissible — and removes any reduction in your SSI payments. Your bottom line might be to increase your SSI benefit to the highest possible amount, while still getting assistance from family members with living expenses.

The small inheritance, or personal injury settlement. If you have less than $14,000 coming to you from an unrestricted inheritance, or settlement of a personal injury lawsuit, you probably already know that it could interrupt your eligibility for SSI (and, perhaps, for AHCCCS, Arizona’s Medicaid program). ABLE makes it possible to take the proceeds — so long as they are less than $14,000 net — and have no negative effect on your benefits. Even slightly larger amounts can be handled this way, depending on timing, other expenses and the particulars of each situation. But one obvious way to increase the number somewhat: in addition to the $14,000 put into an ABLE Act account in any given year, an SSI recipient is permitted to have up to $2,000 in a regular bank account — provided that it’s the only account. So a person who has no assets at all can settle a $16,000 lawsuit without having any effect on SSI.

The Special Needs Trust beneficiary. This one may not always be available (trust language can differ), but it might be a great option: the trustee of a special needs trust, who has been unable to give any money directly to the beneficiary, may now be able to put money into an ABLE Act account. That could give the beneficiary control over the funds, and the ability to pay at least some bills directly. The ABLE Act could give new flexibility to trustees of special needs trusts.

We’re confident that there are other ideas out there, and we even have a few ourselves. Another time perhaps we’ll try to compare the available ABLE Act accounts.

In the meantime, we have one other suggestion: if you have created a special needs trust for your child (or other person) with a disability, you might want to consider modifying it to explicitly permit the trustee to put money into an ABLE Act account. We’re happy — eager, in fact — to talk with our clients about this idea.

AUGUST 29, 2016 VOLUME 23 NUMBER 32
Are you a trustee, or named as successor trustee for a family member or friend? We regularly advise people in your circumstance that they should get good legal advice. Once you’ve done that, however, you are not absolved from any liability if things go wrong.

A trustee is generally permitted to delegate some duties to others — especially to professionals. So it makes sense, and might even be required, for a trustee to hire a stockbroker, or an accountant, or a lawyer. But the ability to delegate is coupled with a duty to monitor the professional.

At least that’s the law in Arizona, and probably also the law in any state that has adopted the Uniform Trust Code. It’s also the law in California, as it turns out — even though California has not adopted the Uniform Trust Code. How do we know? Because of Terry Delgado (though we’ve changed his name for this narrative).

Terry was named as successor trustee on his mother’s trust. After her death late in 2011, he took over, and began managing her trust property. That included two pieces of real estate in the San Francisco area, several bank accounts and some personal property items. Her trust directed that it should be distributed equally between Terry and his two sisters.

When they hadn’t gotten any information about the trust after two years, Terry’s sisters wrote to the lawyer who had been handling the trust administration. They asked for an accounting, distribution of some of the trust’s holdings, and information about what would happen to the real estate. They got nothing back in response. They did, though, get a notice from Terry’s lawyer that one of the properties was being listed for sale. They wrote back saying that they thought the property needed work done before it was sold, and demanding that they get information about what had happened and what might be proposed.

A court hearing was set for six weeks later. Three days prior to that hearing, Terry’s lawyer filed a motion to continue the hearing, claiming that he (the lawyer) had been ill and needed to be involved in the preparation of any accounting. The probate judge conducted a hearing anyway, and decided Terry’s power as trustee needed to be suspended. The judge appointed a professional trustee to take charge temporarily, and ordered Terry to file a complete accounting with the court within six weeks from that hearing date.

Instead, Terry’s lawyer filed a motion to reconsider the order suspending Terry’s powers as trustee. The lawyer claimed that, because of his illness, he had been sleep-deprived and unable to complete the accounting. He had also been working on an accounting in connection with the related estate of Terry’s mother’s late husband. Furthermore, Terry himself had been unable to complete the accounting because of his work schedule and his lawyer’s illness.

At the same time, Terry’s lawyer filed an entirely separate pleading on behalf of the real estate agent who had been hired to list the property. That pleading objected to any change in trustee, and noted that the real estate agent’s company might file a claim against the estate if the listing were to be canceled.

On the last day set by the probate judge, Terry’s lawyer filed an accounting on his behalf — on the wrong forms. The accounting revealed that up to that point, Terry’s lawyer had charged the trust something more than $320,000 in fees — $350 per hour for 916.15 hours.

The probate court received the accounting and set a hearing to review it for two months later. During the delay, Terry’s lawyer filed his own declaration. It apologized to the probate judge for the delays, acknowledged that he had filed the wrong kind of accounting, described his health problems and promised to get the proper accounting filed before the new hearing date already set.

At that hearing, the probate court permanently removed Terry as trustee. It appointed the neutral fiduciary who had been acting temporarily, and noted that no acceptable accounting had yet been filed. At a later hearing on Terry’s lawyer’s request for a reconsideration, the probate judge reaffirmed the same orders.

Terry appealed to the California Court of Appeal. That court upheld the removal and the appointment of a new fiduciary. The appellate judges noted that Terry had every right to hire an attorney to represent him as trustee, but that he had an obligation to monitor his attorney and to see to it that his duties were properly discharged.

Terry’s attorney had created a serious conflict of interest by appearing in the same proceeding on behalf of someone who asserted a claim against the trust, ruled the appellate court. The attorney’s assertion that there was no “actual” conflict of interest in the dual representation did not relieve Terry of his duty.

It is perfectly permissible, ruled the appellate court, for a trustee to hire a professional — like an attorney — to handle trust business and to delegate authority to that professional. The trustee, though, is still required to monitor the professional, and to hire a more suitable alternate if the attorney is unable to handle the assignment — whether that is because of illness, unfamiliarity with trust administration procedures, or otherwise. Desbiens v. Delgman, August 10, 2016.

A recent case from the Alaska Supreme Court addresses special needs trusts. It doesn’t break any legal ground (the decision actually focuses on an entirely procedural issue), but it does give us a chance to talk about common problems arising in the administration of such trusts.

“T.V.”, then twelve years old, was riding his bicycle on an Anchorage residential street when he was struck by a car. He was seriously injured; he spent months in a coma, incurred over a million dollars in medical bills, and is now paralyzed from the chest down.

A lawyer was hired, and a lawsuit filed. Unfortunately, there was not enough insurance coverage to pay for T.V.’s care, and the settlement ultimately reached was not large enough to cover T.V.’s medical costs.

What to do with the too-small settlement? The lawyer asked the Alaska courts for permission to transfer T.V.’s settlement proceeds to a special needs trust, managed by a local Alaska non-profit. As it happened, the attorney sat on the Board of Directors for the non-profit, but he explained that he would avoid any involvement in managing T.V.’s money.

T.V.’s father Jack apparently became unhappy over the trust’s administration. He complained that the non-profit refused to make T.V.’s money available for his needs — though the non-profit insisted that he had never actually requested any trust distributions. Whatever the basis, Jack, representing himself, filed a motion with the court which had approved the original settlement. His motion asked that the court release T.V.’s trust money to him (with interest); he apparently figured that he could make better decisions about the settlement money than the non-profit trustee.

A court officer considered Jack’s request, but noted that the trustee was not actually a party to the original lawsuit, and so recommended that it be denied. Jack appealed to the Alaska Supreme Court, which directed the lower court to enter a final order on Jack’s petition. In response, the trial judge directed a hearing be held so that Jack could explain his concerns.

At the hearing, the non-profit trustee explained that they had never received any written requests for distributions. Jack insisted that he had made verbal requests, which had been ignored or denied. The trustee responded that they require requests to be written, and that they would work with Jack to resolve his concerns.

The trial court ultimately ruled that the trust itself was not a party to the personal injury lawsuit, and that any order directing return of the funds could have unintended consequences (like T.V. losing his eligibility for Medicaid coverage for his medical needs). Jack’s request for return of the trust funds was denied.

The Alaska Supreme Court then took up Jack’s appeal, and agreed with the trial judge. The correct way for Jack to proceed, they ruled, would have been to file an action for court supervision of the trust, and lay out his grievances with the trustee in that proceeding. For the moment, at least, Jack’s objections to the administration of the trust were unavailing. In the Matter of a Petition for Approval of a Minor Settlement T.V., March 18, 2016.

Though there’s not much of legal substance in T.V.’s father’s challenge to his special needs trust, there is a lot that is of practical interest. Many special needs trusts name professional trustees. Family members often feel that they should be given more autonomy and control in management of those trusts. Professional trustees, however, are required to consider the needs of the trust beneficiary first — not the needs or desires of family members.

The appellate decision in T.V.’s trust case does not indicate how much money is in the trust, but one can reasonably infer that the settlement amount was very modest. In such a case, the challenge to a trustee is to maximize the benefit to the beneficiary (T.V., in this case), while minimizing any effect on Medicaid, Supplemental Security Income or other resources providing assistance or care. The trustee also has to keep administrative costs, accounting requirements and tax considerations in mind. All that must be balanced to make sure the trust’s administration is handled as carefully as possible.

Family members often see those constraints as unnecessarily restrictive. When families (particularly caretaker families) have settled on what they see as a good use of the funds, they often resist any discussion of alternatives, limitations or explanations about why their planned use may need to be modified. Tensions can and do arise, and can be exacerbated by what the family sometimes sees as bureaucratic excuses.

T.V.’s trustee’s requirement that requests be put in writing makes good sense, and is a reasonable limitation on fund use. A willingness to work with family members and sort out the priorities is critical; though the family may see that as the trustee being obstinate, it is important to have a process and to follow it.

What about when family members act as trustee? Sometimes the loss of a professional filter can put the trust at risk, leading to too-rapid diminution of its value and possible unintended effects on Medicaid and other public benefits.

What about just turning T.V.’s money over to Jack, his father, to manage and spend on his own? That likely would result in the temporary — or even semi-permanent — suspension of the very public benefits keeping T.V.’s medical and personal care going (we don’t know enough about his actual benefits profile to be certain of that, but it’s a likely outcome).

It can be a challenge to figure out how best to manage and spend limited personal injury proceeds for a trust beneficiary with considerable medical and social needs. Family members’ wishes are of course important, but should be carefully considered and monitored. A good working relationship is critical.

Not every client we speak with wants to set up a trust for generations of descendants, but some do. The notion of allowing assets to grow for two or three (or more) generations can be attractive.

It is difficult, of course, to imagine what one’s grandchildren and great-grandchildren will be like when they grow up. There’s another challenge that is less obvious, though — what will the economy, the legal environment, and the very notion of trust planning look like in, say, 80 years?

We’re not particularly good at predicting the look of the landscape at the turn of the next century, but occasionally we get a little insight into the problem when considering the plans made several generations ago. Trusts can easily live for a century, and the problems facing trust beneficiaries today might or might not have been considered when those trusts were drafted.

That’s what Pennsylvania’s intermediate appellate court had to deal with in a recent case it considered. At issue was the trust established by Edward Winslow Taylor in 1928. Mr. Taylor died in 1939, and the trust became irrevocable. It continues — altered in at least two fundamental ways — since then.

Originally, the trust named The Colonial Trust Company as trustee. Two years later he amended the trust to change the trustee to The Pennsylvania Company for Insurance on Lives and Granting Annuities as trustee, since it had assumed the business of the initial trustee in a merger. In the following eight decades, a series of mergers and buyouts had left Wells Fargo Bank, a national bank and trust company, as trustee.

The trust initially paid its income to Mr. Taylor’s daughter, Anna Taylor Wallace. When she died in 1971, she used her power to direct the trust income to her oldest son, Frank Wallace, Jr. Upon his death in 2008, the trust was divided into four separate trusts — one for the benefit of each of his children, with each then being worth a little less than $2 million. Each trust will continue until 2028.

A lot has changed in the practice and law governing administration of trusts since the 1920s. As just the latest illustration, Pennsylvania, where these trusts are administered, has adopted the Uniform Trust Code (as has Arizona). Trusts written almost a century ago seem hopelessly dated today.

Two years ago, three of the four trust beneficiaries suggested updating the language of the trust to reflect more modern thinking. One change they wanted to make: they argued that the trust should be modified to allow the four of them, if they chose, to change the trustee from Wells Fargo to a new corporate trustee.

Though no beneficiary objected to the change, Wells Fargo did object. The bank convinced the Philadelphia judge that the new Pennsylvania Trust Act did not allow such a change, even if the beneficiaries had all agreed. The beneficiaries appealed.

In the appellate court, the beneficiaries argued that all they were doing was to modernize the trust’s language. The inclusion of a power to change trustees, they insisted, would be considered commonplace today. Furthermore, the Pennsylvania version of the Trust Code clearly permitted modifications so long as all beneficiaries (and the original settlor, if he had still been living) agreed.

Not so fast, insisted Wells Fargo. The scholars who drafted the Uniform Trust Code had clearly indicated that their intention was not to permit a change of trustee by modification of the trust document — even if all the beneficiaries did agree. The bank pointed to the comments written by the uniform code’s drafters in support of their argument.

The appellate court, in a split (2-1) decision, sided with the beneficiaries. According to the majority opinion, the comments written by the drafting committee shouldn’t even be consulted unless there is ambiguity in the language of the statutes. Here, there is not — the Pennsylvania Trust Act permits beneficiaries, acting together, to make a change that includes the power to change trustees.

The dissenting judge would have found that removal of a trustee is a different matter from other trust amendment provisions. In fact, the Pennsylvania statute includes a specific method for trustee removal — and the agreement of the beneficiaries is not a method included in that separate statute. The specific trustee removal provision should have governed over the general modification provision, in the view of the dissenting judge. Trust of Edward Taylor, September 18, 2015.

As we note above, Arizona has also adopted a version of the Uniform Trust Code. Does that mean that an Arizona case would be decided the same way? Perhaps not.

Arizona made small but significant changes to the uniform law before adopting it. Those changes might well compel the opposite result — and particularly where the question appears to have been a close question even under Pennsylvania’s version of the uniform law.

Nonetheless, we like to see discussion about the Edward Winslow Taylor case, for at least these three reasons:

It highlights how much hubris is involved when we “plan” for management of assets a century or so after our own demise. That doesn’t mean it can’t be done, or even that it shouldn’t be tried — but it does remind us that flexibility is key.

We presume that Mr. Taylor was a descendant of Edward Winslow — a signer of the Mayflower Compact. While we’re not descended from Mr. Winslow, we are descended from his sister. It makes us feel proud to see that this (our) patrician family remains relevant today.

“We” in this case means your author and his brother Steven. Not only does Steven now live in Philadelphia (where Mr. Taylor’s trust is administered and was litigated), but October 19 (the day of publication for this little newsletter) happens to be his birthday. It’s a small world, with plenty of odd circles to keep us mildly entertained (and by “us”, here I mean me).

Jessica Waltham (not her real name) died tragically in 2012, when her home south of Tucson burned down. She left a small estate, three sons and a bubbling dispute over the validity of her living trust.

Jessica had first signed a living trust in 2000. She titled her home, and her bank and investment accounts to the trust. She also signed a “pour-over” will (leaving the rest of her estate to her trust), and powers of attorney.

In that initial round of planning, Jessica’s trust and related documents left everything equally to her three sons. She named one son, Edward, as her successor trustee and agent on her powers of attorney.

Beginning in 2009, though, Jessica began to revise her estate plan. Over the next three years she made several changes; the last change, early in 2012, named Edward’s two sons as the primary beneficiaries of her trust, and largely disinherited all three of her sons. It still named Edward as successor trustee.

After Jessica’s tragic death, her other two sons challenged Edward’s administration of the trust. They demanded an accounting, insisted on seeing the history of documents signed by their mother, and even started a probate proceeding (though all of Jessica’s assets were titled to her trust, and her will left directed that any other assets be distributed to the trust anyway). As the proceedings continued, the two dissident brothers filed a lis pendens claim against Jessica’s house, seeking to prevent any disposition of the property while they argued about the effect of her trust and its amendments.

Edward, acting as successor trustee, moved to dismiss his brother’s court demands, and to administer the trust (with its last amendments) according to the document itself. Ultimately the probate court agreed, and ruled that Jessica’s other sons had not standing to demand an accounting (since they were not trust beneficiaries) and had not raised sufficient evidence of any wrongdoing to require Edward to respond.

The probate judge took one step further, ruling that the filing of a lis pendens was improper. The judge imposed sanctions against the brothers, finding that they had no legitimate reason to claim any interest in the trust’s property — even if they were to be successful in the trust interpretation action, the property unquestionably belonged to the trust. The probate judge may have been moved by other actions taken by the brothers, including filing a change of address form with the Post Office to have their mother’s mail redirected to them, despite the fact that Edward was in charge of managing the trust’s (and their mother’s) property.

The Arizona Court of Appeals, ruling last week in a memorandum opinion, agreed with the probate judge. According to the appellate judges, Jessica’s two sons had no standing to demand an accounting or explanation from Edward as trustee. They had no basis for filing the lis pendens, and were properly sanctioned for doing so (and for refusing to release it when challenged). The judgment against them was upheld, and the Court of Appeals added an additional sanction of attorneys fees and costs against them for the appeal, as well. In Re the Wootan Revocable Living Trust, February 13, 2015.

The family dispute arising out of Jessica’s trust is part of a growing trend in the estate planning arena. As revocable living trusts have become more common and popular, the pace of trust challenges has picked up, as well.

One of the hallmarks of trust administration is that it usually is not supervised or monitored by the courts. Of course disgruntled heirs have the ability to seek court intervention — but the probate courts generally are slow to intervene unless there is a serious challenge by someone who clearly has a right to raise that challenge. Mere belief that something must be wrong is not enough; a challenger must have standing and an articulated reason for seeking court monitoring.

Turn the question around, though. If you were Jessica, and had decided to disinherit your children in favor of some of your grandchildren, what might you have done to reduce the likelihood of a challenge? Would it help to share your plan with the affected children? To explain your intentions in writing, or by a recorded message?

The two primary challenges Jessica’s sons raised were typical: they claimed that she must not have understood what she was doing, and that she must have been persuaded by Edward to make the changes at his request. Both are difficult to prove, and suspicion — even strong suspicion — is not enough. But would Jessica’s lawyer’s notes help show that she perfectly understood what she was doing, and that it was her own wish to make the change?

We’ve written several times about the relatively new concept of “trust protectors.” The idea is that a trust can be much more flexible if someone — necessarily someone who is entirely trustworthy — has the power to make at least some kinds of changes after the trust becomes irrevocable. The precise power of a trust protector can usually be spelled out in the trust document, but frequently includes the power to amend the trust (or even terminate it), to change beneficiaries or to remove a trustee and name a successor.

While trust protectors have been the subject of much writing, they are still new enough not to have been spotted in the court system very often. Some of that, of course, is because the very existence of a trust protector can sometimes avoid the need for court action — or head off a court contest, if someone is unhappy with the trust’s administration. Mostly, though, the idea is too new, and has not even been formalized in many states.

Arizona has a specific statute allowing trust protectors. States are increasingly codifying similar provisions, often as part of the Uniform Trust Code, which has been adopted now in over half of the states. Florida is one of those states, having adopted its version of the Uniform Trust Code — expressly including a provision for trust protectors — in 2008. Now a new appellate case out of Florida gives some insight into how the trust protector might be used.

Zach Moore (not his real name) was a successful businessman who retired to Florida, where he lived with his second wife Patty. He had two children from his first marriage. Like many people, Zach decided that he should have a revocable living trust; he signed trust documents in 1999 and rewrote them in 2008, the same year that Florida adopted the Uniform Trust Code. His new trust included a provision permitting the trustee to name a trust protector in order to amend the trust to clarify any ambiguity in the future. He also included some specific language making it clear that after his death the trust was to be primarily for his wife’s benefit, and that his children’s shares would be created only on her death. He and Patty were named as trustees, and upon his death Patty would continue as sole trustee.

Zach died in 2010, and Patty took over as sole trustee. Not long after that, Zach’s two children brought a suit against Patty alleging that she was not managing the trust properly, and demanding an accounting from her. She filed a motion to dismiss, alleging that they were not beneficiaries of the trust at all — their separate-share trusts, she argued, would be created only upon her death.

The trial judge disagreed, ruling that the trust would divide into separate shares, not be transferred to new trusts. That meant that the children were beneficiaries, although their interests did not arise until Patty’s death. Still, they would have standing to challenge her administration of the trust.

Patty’s response: she appointed a trust protector, as provided for in the trust document. That trust protector amended the trust to make clear that upon Patty’s death the then-trustee was to distribute the remaining assets to a new trust, which would then split into two shares for Zach’s children.

Did that resolve the issue? Not quite. The trial judge ruled that the purported amendment by the trust protector was ineffective, because it did not benefit all the beneficiaries of the original trust — it would leave Zach’s children with no power to challenge Patty’s actions as trustee.

Patty appealed, and the Florida Court of Appeals reversed the trial court’s ruling. The appellate judges first noted that the then-new Florida Trust Code allowed for inclusion of trust protectors, and that the powers given to the trust protector in Zach’s trust were not outside the scope of the law. Importantly, the appellate court specifically rejected the children’s argument that the Uniform Trust Code makes court modification the only way to amend an irrevocable trust.

The Court of Appeals went on to note that the trial judge’s reading of the trust to find a single trust dividing into shares was not unambiguously clear from the trust document. That meant that the trust protector’s actions to clarify an ambiguous provision was clearly within his authority — and the amendment was valid. “From the trust protector’s affidavit,” wrote the court, “it appears that the husband settled on the multiple-trust scheme for the very purpose of preventing the children from challenging the manner in which the wife spent the money” in the trust he had established. That purpose should be upheld, decided the appellate judges; the court specifically approved the trust protector’s amendments. Minassian v. Rachins, December 3, 2014.

Arizona’s trust protector statute is, if anything, broader than Florida’s statute. Powers that can be assigned to a trust protector are spelled out, with the specific provision that they are not limited to those listed. Trust protectors can be an important and effective way to address possible future disputes; it can make sense to include a trust protector, especially in a case where future contentiousness is anticipated.

Let’s imagine that you are the trustee of an irrevocable trust, and you are considering making a distribution from the trust. Perhaps the distribution has been requested by a beneficiary, or a family member. How do you make your decision?

There is surprisingly little written direction for trustees. Partly that is because, until the middle of the twentieth century, trustees were most often professional, trained institutions — like banks and trust companies. Only in the past half century or so has the notion of a family member acting as trustee become common, and there are many more small professional organizations acting as trustee, as well.

That is, of course, a good thing. There is no reason that only large banks are suitable to act as trustee (though there is no doubt that they are the appropriate choice for some trusts), and the democratization of trusteeship, if you will, is a positive legal and social movement. But that does also mean that people without any particular training or background are now being called upon to make decisions about trust distributions.

How do you decide? Here are some items to consider (and not necessarily in order of importance):

What do the terms of the trust say? It’s surprising how often the answer is actually in the trust document, but forgotten because no one has looked at the trust for months. Read the trust, looking for reference to the kind of distribution that is proposed.

Is it clear that the distribution will be for the benefit of the beneficiary? If the beneficiary’s parents (or children, or neighbors, or creditors) really, really want you to make the distribution, that is not enough — look at the benefit to the beneficiary.

How large is the proposed distribution as compared to the size of the trust? It should be much easier to approve purchase of a new home from a trust worth several million dollars than from a trust with a $200,000 balance.

Are there other rules to consider? For instance, will the distribution have an effect on the beneficiary’s Medicaid eligibility, or Supplemental Security Income benefits? If so, that doesn’t necessarily mean you can’t make the distribution — but you should be sure that the benefit outweighs the costs.

Will other people benefit from the proposed distribution? If you agree to purchase a vehicle for a child with a disability and difficulty getting to doctor’s appointments (for instance), will the vehicle benefit the child’s parents or other family members? Again, that doesn’t mean you are necessarily prohibited from making the distribution, only that you are required to consider those ancillary benefits.

How closely is the proposed distribution related to the original purpose of the trust? If the trust was funded by the proceeds from a personal injury lawsuit, for example, it is easier to approve expenditure of funds for an experimental medical treatment than if the trust was set up primarily for education of the beneficiary.

What about remainder beneficiaries? Who is scheduled to receive the trust balance upon the death of the current beneficiary? They don’t have a veto right over the proposed distribution, but their interests have to be considered. Does the trust document say you can ignore the remainder beneficiaries? OK — but they are still likely to see an accounting, and they might have questions; you should be prepared to answer.

Will the expenditure lead to liability for future costs? If you buy a house (or a car) who will pay the insurance and upkeep/maintenance costs? If someone agrees to pay the ongoing costs, is there a clear understanding about what will happen if they do not follow through?

Are you sure your own interests are not tied up in the proposed distribution? If you are a relative of the beneficiary, might the proposed distribution benefit you as well? If, for instance, the beneficiary’s doctor says that a therapy pool would be a good idea, can you assure anyone who asks that you agreed to use trust funds for a pool at your house without considering how nice it would be to have a hot tub? Conversely, can you be sure that your refusal to approve an expenditure was not motivated by your interest in collecting a fee as trustee? If your reaction to those suggestions is even slightly defensive, that should give you additional pause (rather than letting you off the hook).

If you approve a significant purchase, have you figured out how to title the new house or car, or whether there needs to be an adjustment in the house’s title after you make significant improvements with trust funds? There are no easy hard-and-fast rules here, except this one: you need to consider the titling of the affected asset, and you should document how you finally resolved the question.

There are more items to consider, but that should give you a sampling. We’re working on a checklist of considerations for trustees — and especially trustees of “special needs” trusts. If you have ideas for additional items to add to the list, please let us know. If you just want to know how that checklist project turns out, let us know about that, too.

Meanwhile, you should keep this in mind: acting as trustee is a challenging, difficult, but rewarding job. It’s important to think through your decisions and document how you got to them, but the key goal is usually the same: can your decisions better the life of the beneficiary of the trust?

A reader asks: “could you do an article on how to leave inheritance to a son who is not good at handling money? Should I leave his portion to another son who is good at it? They are very close and would get along.”

First we have a disclaimer, then the answer, then an explanation.

The Disclaimer

We don’t know our reader’s life situation, or her son(s), well enough to give her actual legal advice. The answer we offer will be based on generalities, and might not apply to her very well. This is why one hires a lawyer — to get actual advice based on one’s real circumstances (oh, and for drafting of the documents — but that’s usually less important than the advice).

We do have some observations and suggestions to consider, but they are based on situations that we have seen before and our knowledge of law and human nature. They are offered not as an answer, but as an exploration of some of the alternatives our reader — and you, if you are in a similar situation — should think about.

The Answer

What you probably need, dear reader, is a trust for the benefit of your son who is not very good at handling money. Whether your son who is good at handling money will serve as trustee or not should be a question that you discuss with your attorney. But if you meant to ask whether you should just disinherit your son who is not good with money and give a double portion to your other son (expecting him to take care of his brother) — the answer to that question is a clear and firm “no!”

Some Definitions

(Special bonus section. It will help the explanation flow more smoothly.)

An arrangement where one person handles money for the benefit of another is called a trust. A trust can be formal, with lots of legalistic provisions and directions to the trustee, or very simple. You can simply hand a check to one person, saying “here, take care of this for your brother” and create a trust. But don’t — that’s a sure way to destroy familial relationships and transfer family wealth to lawyers. It is important to have an actual trust document.

A trust can be created in your will (in which case it is called a testamentary trust) or while you are still alive (in which case it is usually called a living trust, though some lawyers prefer the term inter vivos trust). The person who is entitled to receive benefits from the trust, whether right now or upon the death of the current recipient, is called a beneficiary.

A trust that prohibits the beneficiary from transferring his or her interest in the trust’s assets to another person is called a spendthrift trust. That doesn’t necessarily mean that the beneficiary is a spendthrift, though he or she may be.

The person who handles money for another is a trustee, and a trustee is a fiduciary. A fiduciary has an obligation to report the finances of the trust to the beneficiary (beneficiaries, actually — the people who receive benefits on the death of the current beneficiary may also be entitled to reports. But that’s a topic for another day).

If you create a testamentary trust (in your will, remember?), you have pretty much assured that your estate will need to go through the probate process in order to fund the trust. That’s not necessarily a bad thing, but it often comes as a surprise to clients. Avoiding probate while establishing a trust usually means a more expensive estate plan.

The Explanation

The question is deceptively simple, and the answers have a number of repercussions to consider. Can you simply disinherit a child who is not good with money? Yes, you can (at least in Arizona, and assuming the child is not a dependent or minor child). That might lead to hard feelings, and even litigation, but assuming you are competent and your wishes are clearly stated, the disinheritance should be effective.

At the same time, you can leave a disproportionate share of your estate to someone else. You can even tell them you expect them to take care of a sibling (or a grandchild, or a spouse, or anyone else you are disinheriting). But you can’t expect them to actually carry through. They may be saintly and responsible, but they are not immortal. Your son will probably leave his estate to his wife or children — and they might or might not carry through on his obligations. Or your son might have business reverses, or be sued by someone he injures accidentally, or … you can begin to see the variety of problems that could arise.

There’s a practical problem in addition to the legal/financial one. Your two sons get along well? We can tell you that cutting one out and telling the other to take care of his brother will end that positive relationship. The disinherited child will feel like he has to beg for something he is entitled to. The favored child will feel like he has been thrust into a parental relationship with his brother. Each will resent the other.

By creating a trust, you reduce that problem — but you do not eliminate it. The trustee son can now point to the document to explain his decision (“see? Mom said I was not to just turn the money over to you to buy as many cars as you thought you needed”), but there will still be a fundamental change in their relationship. You might want to consider making someone else trustee.

But who? The brother who already doesn’t get along with the beneficiary? (Don’t dismiss this idea so quickly — the question is asked half-humorously, but half-seriously.) The bank? Another family member (the cousin who is a bank officer, perhaps)? A professional (your accountant, your lawyer, your broker)? A professional fiduciary (they are set up in many, but not all, states)? Each of those choices has positives and negatives, and they are the topic for some future discussion here — and a more immediate one with the lawyer you hire to draft your trust.

Best of luck. It’s not easy to deal with your children’s different needs, abilities and expectations.

It’s a small point, but important — and the Arizona Court of Appeals reiterated it in a decision released last week. So it seems to us that it would be appropriate to call attention to this simple rule: generally speaking, a trustee is not personally liable for her (or his) actions as trustee.

There are, of course, exceptions. A trustee may so intermix her personal interests and those of the trust that she is liable both personally and as trustee. There are some trusts that will be treated as the alter-ego of the trustee — so that creating the trust does not shield the trustee from personal liability. Sometimes the trustee’s actions are so clearly wrong that she might be liable, to trust beneficiaries or others. But in the vast majority of cases, a person acting as trustee can bind the trust without exposing herself to liability.

This concept is not esoteric. It is central to the whole idea of trusts. If you name your daughter as trustee, she needs to know that she can administer the trust without exposing her own assets to liability. If you take over a trust after the death or disability of someone else, or even if you are a professional trustee, you need to be comfortable that you will not be liable for the ordinary business of running the trust.

How was this issue involved in last week’s Arizona court case? It was simple: a trust owned a piece of real estate, and the trustee signed a listing agreement to get the property sold. Later the trust canceled the listing agreement, and the listing agent sued the trust — and the trustee — for the amount specified as payable in the listing agreement upon early termination. A jury found in favor of the listing agent, and judgment was entered against both the trust and the trustee. The trustee appealed, arguing that she should not be liable for the trust’s violation of the terms of the agreement — even if she was the one who both signed and terminated the listing agreement.

The Arizona Court of Appeals reversed the jury verdict against the trustee individually, while upholding the judgment against the trust itself. There were arguments about whether the real estate agent was actually qualified to act, and whether he breached his duties to the trust — but those arguments only went to whether the trust could terminate the listing agreement without paying damages. For our purposes, the important part of the court decision is the simple observation that when a trustee signs as trustee, she is not personally liable on the contract. Focus Point/Kantor v. Johnson/Oak Acres, June 19, 2014.

This principle is actually pretty straightforward, and well-established. Why would the listing agent argue that the trustee should be personally liable in this case? Apparently because when she signed the listing agreement, she did not write “as trustee” or similar language on the contract. But, noted the appellate court, her signature only appeared once, and she couldn’t be signing that one time as both trustee and individually — and there was no dispute that the trust, not the trustee, owned the property being listed. Besides, the contract terms clearly indicated that they were between the listing agent and the property’s owner, and the trust was the owner.

Although the listing agent argued that a handful of cases from other states supported holding the trustee liable, the Arizona court disagreed. In some of those cases, noted the court, the trustee had expressly signed as an individual, guaranteeing the performance of the agreement by the trust. In one other, the trustee had failed to make the argument before the trial court (and so was deemed to have waived it). In yet another case, the officers of a corporation signed in one place as officers and another without any designation — and they were deemed to have been signing in both capacities.

So what does this simple appellate case tell trustees about the discharge of their duties? It just makes sense to clearly indicate that you sign “as trustee” when you are acting in that capacity — it helps head off any argument, even if it is otherwise obvious that you are acting as trustee. The same can be said for someone acting under a power of attorney, or for the personal representative of a decedent’s estate. Just to be safe and clear, after your signature you should write something like “as Trustee of the Pyramidal Trust Dated January 7, 2010” or “as agent for John Roe,” or “as personal representative of the estate of Jane Roe” (substituting, of course, the actual names of the individuals or entities as appropriate).

Even if you do not add that language, you probably are not creating any possible personal liability — at least in any document that is clear about your signature being in a representative capacity. Be very, very cautious, however, about language that seems to include some personal liability — if a pre-printed form recites, for instance, that you are signing “as trustee, and personally as guarantor”, take the agreement to an attorney for review before signing. At the very least, strike out the offending language. Acting properly on behalf of someone else should not cost you personally.

When Albert Findlay (not his real name) died in 2002, he left a trust for the benefit of his wife Sharon. Sharon was named as trustee, and the trust document directed that she was to receive “the entire net income” from the trust for the rest of her life. Albert specifically directed that, as trustee, Sharon would not have any right to take principal out of the trust, but he left at least a half million dollars of investable assets in the trust, so it could be expected to produce some income for Sharon. In addition, the trust included several pieces of investment property — Albert appears to have been a moderately wealthy and successful man.

Albert also had three daughters from his first marriage (that is, they were not Sharon’s children). One of the significant assets in the trust was a 20.28% interest in an apartment building in downtown Prescott, Arizona. Albert’s daughters owned the remaining interest and managed the building.

Already the description of Albert’s estate plan should give some clues about what ended up going wrong. In our experience, clients have a hard time imagining what the family dynamics will actually look like after their deaths. We can guess that Albert might have had such a failure of vision. Would Sharon handle the trust properly? Would she get along with her step-daughters? Would any of them, financially enmeshed as they were, seek to take advantage of the others? Would all of them understand their obligations to one another, providing information and responding reasonably when asked?

It is not clear from the court record (you predicted that there would be a court proceeding, didn’t you?) who acted first, but in the few years after Albert’s death several things happened:

Two of his daughters, as managers of the apartment complex, took out a loan against the building. They did not put the proceeds into the limited liability company running the rental building. The building did not generate sufficient income to make the loan payments, and the property was ultimately lost to a foreclosure.

Sharon began automatically transferring $3,000 per month from the trust to her personal checking account, regardless of how much income the trust produced. The value of the stocks held in the trust began to decline.

Albert’s daughters requested accounting information for the trust, but Sharon did not comply for months. In fact, she did not provide any detailed account information until court proceedings had been filed.

The daughters attempted to sell one of the other assets held jointly among them and Sharon’s trust; Sharon objected to some of the terms of the proposed sale and it did not go through. The daughters then formed a new limited liability company and transferred their share of that asset to the new LLC. Meanwhile, they received an offer on the struggling apartment building (before the foreclosure) but rejected it without consulting Sharon.

Once litigation began, Sharon hired an attorney and paid about $70,000 in legal fees from the trust. She actually initiated the lawsuit, seeking damages for her stepdaughters’ handling of the apartment building. They countersued, asking that she be removed as trustee, ordered to account and ordered to return money she should not have taken from the trust.

Meanwhile, Sharon was receiving trust checks for rental payments on another trust asset, a commercial rental building. She deposited those checks into her personal account directly, and reported the income on her own income tax return rather than showing it as trust income. In fact, Sharon didn’t even have a trust checking account set up for most of the time she acted as trustee.

The trial court heard testimony from the warring parties, and ended up removing Sharon as trustee (a non-family member took over after her removal), ordering her to return trust money she should not have received, and directing her attorney to return $70,000 in legal fees paid by the trust. Sharon appealed.

The Arizona Court of Appeals affirmed most of the trial judge’s findings, but disagreed about how much Sharon should have been entitled to receive from the trust. The trial judge had ordered Sharon to return everything she had received above the “distributable net income” (DNI) of the trust — that calculation was wrong, said the appellate court. DNI is a tax-related calculation — it is the maximum amount of the income tax deduction available to a trust for distributions to an income beneficiary — and “income” for trust accounting purposes is a different (and often somewhat larger) number, according to the Court of Appeals.

The appellate court sent the dispute back to the trial judge for further hearings to calculate the amount that Sharon owes back to the trust. It also directed the trial judge to conduct proceedings to determine whether Albert would have wanted his trust used to pay for administrative items like legal fees. In the first hearing, the judge had refused to allow Albert’s lawyer to testify about what he might have intended in that regard.

Two other holdings by the Court of Appeals are worth mentioning. First, the appellate judges noted that Sharon’s decision to sell the stocks held in the trust when she took over is not, by itself, evidence of any wrongdoing. Even though the value of the stock holdings had apparently gone down during her administration, that is not necessarily actionable. A trustee is not an insurer, but has a duty to manage trust assets prudently. The trial judge will need to inquire further into the kinds of changes made before deciding to order Sharon to return funds.

Finally, the appellate court noted that there is not necessarily any problem with naming a trustee who has an interest in the trust’s administration. In fact, it is common to name beneficiaries as trustees — they then have a duty to the other beneficiaries, but that does not mean that someone in Sharon’s position is precluded from seeking to assert her own interests in the trust. The trial court will need to review the earlier ruling to make sure that the “conflict of interest” analysis was not too sweeping in its application. Favour v. Favour, February 11, 2014.

It is a challenge to describe a court opinion like the Favour holding without dropping into technical jargon. But perhaps it is more useful and interesting to think about how the litigation — and the outcome — might have been avoided in the first instance. We have a few ideas to suggest — though we are quick to note that we never discussed Albert’s wishes with him, and he might have rejected any or all of these:

Naming a beneficiary as trustee is not at all objectionable, and (as the appellate court notes) it is commonly done. But if the trust’s author intends that everyone be treated scrupulously fairly, it might make more sense to name a disinterested person (or organization) — even a professional — as trustee.

It is uncommon to see modern trusts that require distribution of all income but preclude distribution of any principal. That is an invitation to this kind of dispute, since the characterization of income and principal can be subject to interpretation. It also puts the income and remainder beneficiaries at odds — income beneficiaries are not interested in growth of investment value, and remainder beneficiaries would rather skip current income in favor of that growth.

Putting fractional shares of investment assets into the trust is another way to encourage disagreement — particularly when other trust beneficiaries have management authority over the fractional interests.

Once any level of conflict arose, it might have been appropriate for Sharon to consider application of Arizona’s “total return unitrust” statutory authority. Using that approach, she might have set a presumptive rate of distribution from the trust regardless of the actual income — and reduced the possibilities of disagreement between herself and her stepdaughters.

Including some sort of dispute resolution mechanism in a trust — especially a trust like this one, involving a surviving spouse and stepchildren from an earlier marriage — might make sense as a way of minimizing conflict, avoiding court proceedings and reducing legal expenses.

A trustee has a duty to report to remainder beneficiaries. Someone should have explained that to Sharon early, and pushed her toward satisfying that obligation. Delaying or avoiding her duty did not work to her benefit in the long run.

With remand to the trial court, it may not be too late for Sharon and her stepdaughters to work out some less-costly resolution of their dispute. But some part of the cost (and the breakdown in the interpersonal dynamics) has to be laid at Albert’s door — he could have reduced the conflicts and helped his family avoid disputes by a little more careful thought about the drafting, funding and future of his trust plans.